Affordability in Question as Mortgages Get More Expensive

Another shocking record high has been reported by Zillow’s May 2022 Market Report as mortgage payments are now higher than rent in 40 of the 50 largest metropolitan areas. This number is up from 22 of the top 50 cities in 2019. 

Driven by ballooning mortgage costs, which its base components of housing prices and interest rates both rising to record highs, have made mortgages less affordable than at any time since at least 2007. 

But recently, mortgage rates shot up to 5.78% as of June 23. A new purchase of a typical home at that rate would mean monthly mortgage payments of $2,127, a 51% increase year-over-year or to put it another way, up 36% from the start of the year. 

"Mortgage rates took an unprecedented leap skyward over the past two weeks and quickly multiplied housing costs as they rose," said Zillow Economist Nicole Bachaud. "We are already seeing signs of waning demand, and expect these recent rate hikes to quicken the market's needed rebalancing. While shoppers will likely experience less competition for homes than the frenzied recent months, their purchasing power has dwindled." 

Bachaud goes on to say that lagging incomes behind fast-rising mortgage costs, creating the most significant affordability challenges in the past 15 years. 

The latest data available, April 2022, shows monthly payments have now reached 28% of homeowners monthly income, toeing the dangerous benchmark of 30%, to which anything above is considered “cost burdened.” 

According to Zillow’s historical analysis, affordability last bottomed out in 2006. 

Rents have done nothing but soar since the start of 2021, and the rapidly rising cost of a mortgage still make rent the cheaper option nearly everywhere. A typical rent payment in May is more expensive than a mortgage payment with a 20% down payment, including taxes and insurance, in just five of the 50 largest metropolitan areas. 

Setting another record high, for the 13th straight month, was home values, which while still increasing, slowed its pace of annual growth from 20.9% to 20.7% in April. 

"Arriving in the middle of the spring selling season, this deceleration is a clear signal that buyers are dialing back their demand for homes in the face of daunting affordability challenges," said Jeff Tucker, Senior Economist at Zillow. 

Click here to view the report in its entirety.